Gold’s wounds will take time to heal

The gold market will take time to heal after the metal’s recent drop of more than $200 an ounce.

SAN FRANCISCO (MarketWatch) — Gold futures managed to score their first gain in three sessions on Tuesday, but wounds from the fierce selloff that dragged prices down by more than $200 an ounce in two days will take time to heal.

In the wake of such a huge move in gold prices, “there is always a ripple effect, from basic portfolio adjustments all the way to meeting margin calls,” said Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund, who on referred to Tuesday’s bounce as “weak.”

A scramble to sell gold on 47th St.

(3:13)

Two days of record declines prompts a wave of gold selling on New York's 47th St, better known as the Diamond District. Michael Casey reports. Photo: AP

Gold futures
US:GCM3
were hit by loss of more than $60 on Friday, and then suffered on Monday from their biggest one-day selloff since the 1980s — prompting the CME Group Inc.
CME, -1.00%
the parent company of the main U.S. metals and energy exchanges, to raise the collateral requirements for trading in benchmark gold, silver and other precious-metals contracts.

Declines of this magnitude lead to large margin calls, some of which would be covered by asset sales, said Paul Herber, portfolio manager of the Forward Commodity Long/Short Strategy Fund
FCOMX, +0.22%

Investors typically sell the most liquid instruments first -— Treasurys, investment-grade bonds and large-cap equities, he said, adding that margin is due the day after a market move, so any selling of assets for margin calls would have occurred Monday or Tuesday.

David Morgan, publisher of investment newsletter The Morgan Report, expected the precious-metals market to bottom and start back up once the margin calls were settled.

Prices already saw a rebound on Tuesday, with the June gold contract tacking on $26.30, or 1.9%, to finish at $1,387.40 an ounce on the Comex division of the New York Mercantile Exchange.

Shares of the world’s largest gold-backed exchange-traded fund also bounced back too, though only modestly. The SPDR Gold Trust
GLD, +0.63%
rose 1.1%, following a total plunge of roughly 13% in the prior two sessions.

Declines in gold holdings among ETFs have been partly to blame to for the declines in metals prices this year.

To Jeffery Born, a professor of finance at the D’Amore McKim School of Business at Northeastern University, gold’s big decline didn’t come as much of a surprise.

Born said he decided two years ago stocks were the best long-term investment. The problem with gold? It pays no dividends, costs money to store and includes the risk of being stolen, he said.

It’s a “sucker’s investment/bet,” he said in a recent email.

Born’s critique is nothing new. But many gold bulls remain faithful.

Elliott Orsillo, co-founder and portfolio manager at Season Investments LLC, said the selloff “does nothing to change the long-term, fundamental reasons for holding gold, including hedging against the infinite creation of fiat currencies.”

Other analysts share that view, and Orsillo also noted that the lower prices for gold makes it more attractive to central banks looking to diversify their currency reserves.

But maybe the market won’t be quite the same, even for the bulls.

Near term, the recent declines “will diminish the demand for holding gold as an investment,” said Orsillo. They’ll also have a “lasting effect on the psyche of the average gold investor or speculator.”

‘Gold sentiment has been shattered [after the two-day selloff] and the perceived safety of gold is being called into question.’
Paul Herber, portfolio manager

And investors will have a lot to think about.

Gold momentum is being “clearly negative right now,” and despite Tuesday’s rebound, there are “no clear triggers helping reverse this momentum,” said portfolio manager Herber.

“Gold sentiment has been shattered,” in the wake of the two-day drop, he said. “The perceived safety of gold is being called into question.”

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